Are car loans, college loans so different?

Following is a guest post by Raynard S. Kington, president of Grinnell College.

Before you read on, take a quick look at the car in your driveway or garage. What do you see? If you are like many Americans, you see a symbol of your independence, autonomy, even freedom.

But chances are you are also looking at debt. Federal Reserve data show that Americans who took out loans to buy their cars borrowed an average of $28,000 for the purpose. And lenders are originating about 1.7 million new auto loans every month according to the credit agency, Equifax. Is all that debt a problem? It depends: many economists view reasonable increases in consumer debt as a sign of growing public confidence in the economy.

Our recent public discussion of another category of debt—student loans—has tended to be less fine-tuned.

In a series of speeches, including his 2012 State of the Union and a subsequent speech at the University of Michigan, President Obama has pointed to troubling trends in the growth of student debt. In his remarks, as well as his recently-released plan, An America Built to Last, he notes that total student loan debt now exceeds total credit card debt for the first time ever. “Think about that,” he urged the crowd in Ann Arbor. “That’s inexcusable.”

Like many of my college and university colleagues, I share the president’s concern and applaud his commitment to lightening students’ debt load. At Grinnell, where I am president, our need-blind admissions program, commitment to meeting admitted students’ full financial need, and a current cap of $3,000 per year on loans as part of the aid package reflect our commitment to providing talented students with a college education regardless of means. Higher education is the on-ramp by which millions of young people access society’s economic opportunities and leadership roles. No student should have to forego those opportunities because they cannot afford the toll. Making wealth the primary key to educational access would be inexcusable in a democratic society, as the president has told us.

But in accepting his challenge, we also need to recognize that we are at the start of a long journey to understand the complicated relationship between costs and quality in higher education. Although some may demand a quick, simple solution, the history of our comparable, largely unsuccessful efforts to control healthcare costs suggests that we need to spend significant time and money “looking under the hood” and understanding the system before we start disassembling it or swapping in cheaper parts.

Take the issue of craft. Ford can extract economies of scale when building millions of basically identical F-150s. Whereas every student comes to the table with unique needs, capabilities and dispositions, meaning that we cannot mass-produce the teaching of higher-level analytical, creative or problem-solving skills. It takes dedicated and expert faculty to teach our children: such specialists are expensive to recruit and retain. If we blindly cut costs we may inadvertently create a two-tier system where wealthy students get the educational Lexus while most poor students get a Yugo.

Rather than focusing on cost in isolation, we need to think about value: What are students getting for their money? Is the good so precious that it warrants a high price? And if so, how can we make sure students from all walks of life can afford such a pricey-but-necessary commodity? This value-based perspective was a key element in President Obama’s 2009 decision to more than double the Pell Grant program for low-income students, for example.

The analogy with car debt is revealing in other ways, as well. As it turns out, the two types of debt track fairly closely over the last ten years, per borrower. That is, we tend to go into roughly the same amount of debt to attend a private four-year college that we do to buy a new car. And yet the discussions of an auto loan crisis are scarce relative to those about student debt. So would you rather have a college degree for your money or a new car? Before you answer, consider that the degree is likely to increase your lifetime earnings by anywhere from $241,000 to $1,090,000, depending on your field of study; while the car will depreciate the moment you drive it off the lot and will have an average lifespan of just over ten years. In other words, if you spent your money on a car at age eighteen, by the time you turned thirty it would be worth a fraction of what you had paid; whereas if you had used that money to pay for college your career (and salary) would still be picking up momentum. Which purchase brings greater value to your life?

In the higher education context, as other areas of consumer debt, a manageable amount of debt is not necessarily bad. Conventional wisdom holds that we tend to take care of things we have gone to lengths to purchase. So take a look at your college diploma if you have one, and ask yourself whether it has brought you at least as much freedom and self-sufficiency as the car in your driveway. If so—and, statistically speaking, it is likely to have done so, many times over—ask yourself what that education is worth. As President Obama said in Ann Arbor, “we want you to know how well a car stacks up before you buy it. You should know how well a college stacks up.”

When we can truly answer that question… that’s when the rubber will meet the road.

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Comments our editors find particularly useful or relevant are displayed in Top Comments, as are comments by users with these badges: . Replies to those posts appear here, as well as posts by staff writers.